Whether a plan needs an audit is a four-step determination: count participants as of the first day of the plan year, apply the 80-120 election if it is available, test the small plan waiver conditions, and then pick the form. Each step has a written rule. This guide walks through them in order using the 2025 Form 5500 instructions and 29 CFR 2520.103-1 and 2520.104-46. The surrounding context is in the 401(k) audit requirements guide and the Form 5500 filing guide.
Step 1: Count participants at the beginning of the plan year
The 2025 Form 5500 instructions direct that a return for a plan that covered fewer than 100 participants at the beginning of the plan year follows the small plan requirements, and a return for a plan that covered 100 or more follows the large plan requirements.
The number comes from the plan type:
- A plan other than a defined contribution pension plan uses the number entered on line 5 of the Form 5500.
- A defined contribution pension plan uses the number entered on line 6g(1), which counts participants who have account balances at the beginning of the plan year.
- A defined contribution plan that checks the "first return/report" box in Part I, line B uses the number on line 6g(2), the count of participants with account balances at the end of the plan year.
For a 401(k) plan, the line 6g instructions say the line 6g(2) count is participants who have made a contribution, or for whom a contribution has been made, for this plan year or any prior plan year. Eligible employees who never enrolled and never received an employer contribution do not count. Request the recordkeeper's participant file as of the first day of the plan year and agree it to line 6g(1); do not use a year-end census.
Step 2: Apply the 80-120 participant rule
The instructions list the 80-120 rule as an exception. If the number of participants is between 80 and 120, and a Form 5500 was filed for the prior plan year, the administrator can elect to complete the return in the same category, large or small, as the prior return. The instructions give the example: if a Form 5500-SF or Form 5500 was filed for 2024 as a small plan and the 2025 participant count is 120 or less, the administrator can elect to file the 2025 return under the small plan instructions, including Form 5500-SF for eligible filers.
The regulation behind it, 29 CFR 2520.103-1(d), covers plans with between 80 and 120 participants inclusive at the beginning of the plan year and lets the administrator file the same category of report as the prior year.
Four working points follow from the text:
- The rule works in both directions. A plan that filed as a large plan last year with 85 participants this year can elect to file as a large plan again; a plan that filed as small last year with 118 participants can stay small. The cap on staying small is 120.
- A prior return is required. A first-year plan has no prior category to carry forward.
- The election is the administrator's. The auditor does not make it, but needs the answer on the first day of planning, because it decides whether an audit report is attached.
- A deferred-report election cancels it. The instructions state that if a plan made a short plan year election to defer the accountant's report under 29 CFR 2520.104-50 for the prior year, the current return follows the large plan requirements, including Schedule H and the accountant's report, regardless of participant count.
Step 3: Test the small plan audit waiver
A plan below the line, or electing to file as a small plan, is not automatically free of the audit. The waiver in 29 CFR 2520.104-46 sets conditions.
Participant condition. For welfare plans the waiver applies to a plan covering fewer than 100 participants at the beginning of the plan year, or one that elects small plan filing under 2520.103-1(d). A plan that elects large plan filing cannot claim the waiver. Pension plans must be filing under the simplified annual reporting prescribed under 2520.104-41.
Qualifying plan assets. These include:
- qualifying employer securities under ERISA 407(d)(5)
- participant loans that meet ERISA 408(b)(1)
- assets held by a bank or similar institution, a state-qualified insurer, a registered broker-dealer, or an IRA trustee
- shares of a registered investment company
- investment and annuity contracts of state-qualified insurers
- individual account assets that participants control, where participants receive at least annual statements from a regulated institution
Bonding for pension plans. For each plan year, either at least 95 percent of plan assets are qualifying plan assets, or every person who handles non-qualifying assets is bonded under ERISA 412 for at least the value of those assets. The bond covers the full amount of non-qualifying assets, not only the excess over 5 percent. Welfare plans have no asset-percentage or bonding condition under paragraph (b)(2).
Disclosure. The summary annual report must give the name of each regulated financial institution holding qualifying plan assets and the amount held (qualifying employer securities, participant loans and participant-directed individual account assets are excepted), name the surety company if non-qualifying assets exceed 5 percent, and tell participants they can examine or obtain, free of charge on request, the bond evidence and institution statements, with a pointer to the EBSA regional office if they cannot obtain them.
The waiver does not remove the Form 5500 filing obligation. It removes the audit report.
Step 4: Choose between the Form 5500 and the Form 5500-SF
Under the instructions, a pension or welfare plan with fewer than 100 participants at the beginning of the plan year, and not otherwise exempt from filing, can be eligible to file the Form 5500-SF. Beyond the participant limit, a Form 5500-SF can be filed only for a plan that:
- is exempt from the audit requirement, and not by reason of enhanced bonding
- has 100 percent of its assets in certain secure investments with a readily determinable fair market value
- holds no employer securities
- is not a multiemployer plan
- is not required to file a Form M-1 for the plan year
- is not a pooled employer plan
- is not filing as part of a DCG reporting arrangement
The enhanced bonding exclusion matters in practice. A small pension plan that avoids the audit by buying a bond for non-qualifying assets files the full Form 5500 with Schedule I, not the 5500-SF.
Worked examples
Plan A. A 401(k) plan filed a 5500-SF as a small plan for 2024. At January 1, 2025 it has 114 participants with account balances. The 80-120 rule is available. The administrator can elect small plan filing and file the 5500-SF with no audit, provided the waiver conditions hold.
Plan B. A 401(k) plan filed as a large plan for 2024 with 96 participants with balances at January 1, 2025. Because it filed as large for 2024 and the count is within 80-120, the administrator can elect to file as large again, which carries the audit. The administrator can also let the plan drop to small filing, since the count is below 100.
Plan C. A 401(k) plan with 140 participants with balances at January 1, 2025 files as a large plan. The 80-120 rule does not apply. An audit is required.
Plan D. A small pension plan holds 8 percent of its assets in a real estate partnership interest. It does not meet the 95 percent test. If the person handling the real estate interest is bonded for its value, the waiver holds and the plan files the full Form 5500, not the 5500-SF.
Documentation to keep
- The participant file as of the first day of the plan year, agreed to line 6g(1) or line 5.
- The prior-year return and its category, to support the 80-120 election.
- The asset classification supporting the 95 percent test, or the bond.
- The summary annual report with the required disclosures.
CORAA can prepare the asset classification schedule from the plan's books and recordkeeper reports. The firm makes the audit determination and signs.
Sources
- DOL EBSA, 2025 Instructions for Form 5500 (Section 4 What To File, line 6g, footnote on Form 5500-SF eligibility): https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/reporting-and-filing/form-5500
- 29 CFR 2520.104-46, eCFR: https://www.ecfr.gov/current/title-29/section-2520.104-46
- 29 CFR 2520.103-1, eCFR: https://www.ecfr.gov/current/title-29/section-2520.103-1
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